Assume you are at the beginning of 2001. The real risk-free rate of interest is

Question

Assume you are at the beginning of 2001. The real risk-free rate of interest is 3 percent and expected to remain constant. Inflation is expected to be 2 percent, 3 percent, 4 percent, and 5 percent in years 2001, 2002, 2003, and 2004, respectively. The default premium is 1 percent. The maturity risk premium on four year bonds is 0.50%. What is the nominal interest rate on a four-year U.S. government bond? Assume you are at the beginning of 2001. The real risk-free rate of interest is 3 percent and expected to remain constant. Inflation is expected to be 2 percent, 3 percent, 4 percent, and 5 percent in years 2001, 2002, 2003, and 2004, respectively. The default premium is 1 percent. The maturity risk premium on four year bonds is 0.50%. What is the nominal interest rate on a four-year U.S. government bond?

Explanation / Answer

inflation net=(1.02)*1.03*1.04*1.05-1=0.147

RFR=(1+realRFR)(1+inflation)-1

RFR(nominal)=0.18

and hence use the standard results to proceed

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---